Death In Service schemes

Following the introduction of pension scheme auto-enrolment in 2012 and the requirement for all firms, including new employers to enact it by February 2018, the number of employees in company pension schemes has never been higher.

This means that many more employees will be entitled to the Death In Service benefit schemes that numerous pension companies operate and offer.

The reasoning is that employees will be incentivised by the reassurance that if they die whilst employed, their dependants will receive a pay-out that will help to cover expenses like mortgages, household bills, school fees and such like.

However, whilst many employers may have rushed to put their schemes (and associated workplace policies) into place in the early days, it’s definitely worth looking again at them to consider whether they are still fit for purpose.

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What is a death in service scheme?

It means that the employee’s family or a nominated beneficiary will receive a lump sum, free of tax from the company pension scheme if the employee dies before they retire.

The size of the lump sum will vary depending on the scheme and the employer but it’s normally between two and four times the employee’s annual salary.

To qualify, the employee only needs to be on the payroll at the time of death. There is no requirement to prove that their job was a proximate cause of their death.

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Recent (2016) figures from the DWP show that there are now over nine million workers aged between 50 and 74, an inevitable consequence of the ageing population. However, whilst their involvement is generally regarded as a positive by employers, for some older employees, it may come as a surprise when they are informed that they aren’t covered by the company Death in Benefits scheme due to their reaching a certain age – for example, 65 or 70. The immediate thought is that this is age discrimination but unfortunately for the employee, it isn’t.

The Equality Act 2010 includes an exemption which allows employers to withdraw benefits to employees when they reach the age of 65.

Paragraph 14, Schedule 9 of the Equality Act 2010 says: It is not an age contravention for an employer to make arrangements for, or afford access to, the provision of insurance or a related financial service to or in respect of an employee for a period ending when the employee attains whichever is the greater of—(a) the age of 65, and(b) the state pensionable age.(2) It is not an age contravention for an employer to make arrangements for, or afford access to, the provision of insurance or a related financial service to or in respect of only such employees as have not attained whichever is the greater of—(a) the age of 65, and(b) the state pensionable age.

Of course, as the state retirement age increases in line with government plans to accommodate the ageing workforce and the cost of providing pensions as people live longer, the age restriction will rise, as per paragraphs 1b and 2b.

Although this is the statutory requirement, there is nothing to stop employers or pension schemes deciding on more generous provision. Some employers have introduced policies that set out 70, rather than 65 as the cut-off point, although this may still affect employees who have elected to remain in work after that age.

Nomination of benefit

It’s in everybody’s interest, and particularly the employee’s, for them to complete what’s known as an Expression of Wishes form that will be forwarded to the trustees of the pension scheme. It’s important to note that in many cases, the form will be non-binding on the trustees, and this is often stated on the form itself.

Employees should inform their employers if they undergo a life change that will affect their Expression of Wishes and the employer should set up a regular review procedure, at least every year or at most every three years to ensure that all such expressions are still current and relevant. If this isn’t done, the consequences could be unwelcome.

A recent case adjudicated by the Pensions Ombudsman involved an employee who had remarried and had four step-children who were financially dependent on him. He had, unfortunately, neglected to update the form that nominated the beneficiaries of his Death In Service benefit to take into account his remarriage. Despite the obvious unfairness of the situation, the pension trustees had to follow his original wishes and his four step-children and second wife got nothing.

If the employee leaves employment for any other reason than death, the policy will lapse. The level of cover is not prescribed by legislation, although limits may be placed on the size of the lump sum by the insurance company.

Death In Service benefits and Unfair Dismissal

A recent case shows that it’s very important for employers to consider carefully (and obtain legal advice on) dismissing employees who may have the benefit of Death In Service cover. The Employment Appeal Tribunal said that the employer had to pay the full value of the loss of benefit where the employee died within weeks of being unfairly dismissed on the grounds of capability to work. The decision cost the employer £85,000.

To avoid (or at the very least, reduce) the prospect of large claims, employers should make sure that, where they intend to dismiss an employee who is suffering from a particular health condition, the dismissal is not unfair or discriminatory. This is particularly important if the employee’s condition is potentially fatal or could result in death within a short period of time after the dismissal, although the case cited above shows that even an unexpected death may still catch the employer unawares and lead to claim problems.

What HR needs to do

Employers who are providing a Death In Service benefits scheme need to bear in mind that they should:

• provide guidance to employees on making nominations;

• recommend that workers take professional advice on their options, including setting up discretionary trusts (whilst stressing that no legal or financial advice will be provided by the employer themselves);

• remind employees to review their nomination forms regularly, at least every three years;

• set up a review system that will automatically re-examine Notification of Wishes at least annually;

• draw the attention of employees to any condition in the contract that stipulates an age-based cut-off for the payment of the benefit.

rradarstation

rradarstation is a resource available through the AXA MLP policy where policyholders can access rradar’s legal advisory team over the phone or by email and web portal that provides over 1,000 articles, step by step guidance sheets, forms, sample letters and templates to download relating to running a commercial business including the law on age discrimination, employee benefits and other aspects of human resources and employment.